Cancellation of telecom licenses will add to Indian banks's woes: Moody's news

27 February 2012

Rating agency Moody's has warned that the Supreme Court's ruling cancelling 122 telecom licenses will add to the problems faced by Indian banks.

"Though the severity of loss will be high, the impact should be manageable," Moody's said in a statement.

On February 2, 2012, India's Supreme Court cancelled 122 2G licences provided after January 2008 in on grounds they were issued in a ''totally arbitrary and unconstitutional'' manner. The court also directed Telecom Regulatory Authority of India (TRAI) to make fresh recommendations 2G licence allocations. (See: SC cancels all 2G licences, orders fresh spectrum auction).

"Although we expect major losses for the banks from the $2 billion in loans granted to those borrowers in the telecoms sector affected by the cancellations, the exposures remain immaterial when considered in isolation and are therefore marginally credit-negative for banks," says Vineet Gupta, a Moody's vice president and senior analyst.

The more significant negative credit impact arises from the fact that this development is a new addition to a growing list of areas of concern from an asset quality point of view, the rating agency said.

In November 2011, Moody's had changed the outlook for telecom to negative from stable. It had pointed out that a slowdown in economic growth and fall in the repayment ability of some corporate borrowers would pose a risk to asset quality at the banks.

"And as we stated in November, we are concerned that the difficult operating environment will continue to pressure the asset quality as well as the ratings of the banks. In this context, the banks most at risk of a downgrade are those that feature insufficient earnings and capital buffers to withstand their combined exposures to yet-to-be-reported troubled borrowers on top of above-average non-performing loans and restructured loan levels (under our scenario analysis)," said Gupta.

Indian banks' exposure to the telecom companies that are losing 2G licences is around 0.6 per cent of their total loans, Fitch had said in an early report.